Unsustainable

Unsustainable

Author Chris S – Your Small Business CFO

Unsustainable – It’s a word with such a negative connotation. It also is a word heard often in regards to the debt of the United States and the on-going out-of-control spending. But what does that have to do with business? Before we look at that let’s first have a little refresher on the debt and spending of the U.S.

I Owe How Much?

At the time this is being written, the U.S. national debt is about $17.4 trillion and the county is spending (as of a 2012 estimate) $3.8 trillion and collecting $2.5 trillion. That means that the amount borrowed each year is 50% of revenue collections and only about 66% of the expenditures are funded from tax collections. Since the U.S population is about 314 million, that means that evenly divided each member of the U.S. population effectively owes $55,000. Of course, since there is never going to be an even distribution of this debt, for practical purposes, those who will primarily have to pay this debt will undoubtedly have to pay far more than $55,000. To make this debt figure even more significant in your mind, consider that the population of the world at present is around 7 billion. If every one of those 7 billion had to pay an equal portion of the U.S. debt, each would owe approximately $2,500. Of course that is not going to happen. I only mention it to amplify just how unsustainable the current debt level and spending of the U.S. is. Remember that this is only on the federal level. There are states, counties, and cities that also owe significant amounts and are spending in excess of collected revenues. Again, to make this picture even bleaker, consider that the debt levels shown are only what is currently reflected as debt and does not consider unfunded liabilities. By unfunded liabilities I am referring to such things as pensions and health care for future government retirees. The government (local, state, and national) is spending like a pig.

pig

If I only gave you the information above I would just be reiterating bad news that is reported on a regular basis. What the government has done and continues to do is simply unsustainable. However, I have no desire to express a negative attitude or outlook on life. On the contrary, I tell the story of the U.S. Government’s financial picture to give you a background for what I really want to discuss.

Don’t Act Like the Government

Okay, I realize that the title of this section is expressed as a negative, but it really intended as an encouragement to do what you should and need to do. Here are a few things to help your company avoid looking like a miniature version of the federal government.

  1. Avoid debt, particularly long-term debt, if at all possible
  2. If you do have to use long-term debt, only use it to finance non-current activities such as the purchase of capital equipment that has a life of several years
  3. Even if you use debt as in number 2, be sure that the cash flows you generate will be sufficient to pay off the debt
  4. Spend within your means. Your business probably doesn’t need brand new furniture and may just as well get by with used equipment
  5. Put aside a reserve for the unexpected
  6. Establish sinking funds for major planned future expenditures. It is nice to be able to buy a piece of equipment or some other asset with cash rather than debt
  7. Manage receivables carefully. If you don’t you are facilitating a customer acting like the U.S. Government with you as the lender

Bottom Line

Simply put, manage your finances carefully. The last thing you want is the stress of trying to navigate the business world while running a business whose model of operation is unsustainable.

Are you being careful with your finances? Are there other things you can think of that can minimize the likelihood of having an unsustainable business?

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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